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Daimler plant in Hungary: Group earnings increased by around a fifth
Photo: Sandor Ujvari / EPA-EFE
It's reporting season and everyone is watching.
In the past few weeks, many large companies have presented their business figures for the third quarter of 2021.
And it is becoming apparent that this will be a pretty spectacular year: The profits are on record course - despite delivery bottlenecks and the fourth corona wave.
After an already brilliant first half of the year, in which the DAX companies made historically high profits, the profit boom continues - sales: plus 8.6 percent compared to the previous year, operating profits: plus 152 percent, as the consulting firm EY has calculated.
Wow!
A nice thing for the company and its shareholders, of course.
But do ever higher profits actually benefit the economy and society in the long term?
Doubts are allowed.
Because the expansion can also be interpreted differently: as a symptom of deeper-lying structural shifts.
Less sales, more profit
Particularly noteworthy: Even corporations suffering from the rampant shortage of preliminary products can further increase their profits. Take Daimler, for example: due to the lack of chips and other inputs, the Swabian automaker sold a quarter fewer cars than in the third quarter of 2020 - but profits rose at the same time. The group result increased by around a fifth.
At BMW, the group result rose by more than 38 percent - while the number of vehicles delivered fell by 15 percent. Volkswagen recorded a small operating deficit in the third quarter, but already expects a "significantly positive performance" in the current last quarter. Earnings plus so far: 264 percent compared to 2020. While the German auto industry is producing around 30 percent fewer cars than before the corona pandemic, as the Council of Economic Experts has calculated, the automaker's profits are rising sharply.
An unexpected flood of cash is pouring into other industries as well. The pharmaceutical and agricultural multinational Bayer increased its earnings per share by almost 30 percent, the chemical giant BASF by as much as 160 percent. At Telekom, "business is going even better than expected," and profit is at a record level. Adidas posted a profit jump of one billion euros in the first nine months of this year, also because the fashion group can enforce its price expectations better than before, which offsets the more expensive purchase.
The surprisingly strong earnings situation is contributing to the fact that share prices continue to rise.
The Dax has gained 1000 index points since the beginning of October.
The situation is similar elsewhere.
The European share index Euro Stoxx 50 rushes from one all-time high to the next.
In the US, too, corporate profits have skyrocketed, according to figures from the Federal Reserve Bank of St. Louis.
The US stock index S&P 500 has risen by a quarter since the beginning of the year.
What's going on here?
Why are companies' profits rising so sharply while the economy as a whole is still suffering from the consequences of Covid?
(Watch out
for new numbers on economic growth in the EU
Tuesday
.)
The market, the power and the price
There are two main reasons for the sharp increase: First, a demand that has built up during the lockdowns encounters a supply that is still limited - due to corona restrictions, trade barriers and labor shortages. Second, the severe recession of the past year has clearly shifted the balance of power in many markets. Bankruptcies and takeovers have reduced the intensity of competition, and the remaining companies are able to enforce their price expectations even better. (We talked about this problem a year and a half ago.)
The interaction of the two factors is now increasing the inflation dynamic: in the consumer goods industry, around half of the companies are planning price increases.
The situation is similar with the manufacturers of intermediate products and capital goods.
They use the greater market power, pass their increased purchase costs on to their customers - and try to get a profit-increasing premium for themselves.
(
Wednesday
there are new figures on inflation in Europe.)
What times!
Employees are on short-time work, plants are shut down due to a lack of materials, but profits are bubbling up.
This cannot and should not go on like this in the long run.
Excess savings
In order not to be misunderstood: Profits are not a bad thing, they are the prerequisites for investments and innovations.
This in turn increases productivity and living standards - the company's success ultimately benefits society.
Or so it should be.
But this system has stuttered, not only in Germany: companies invest relatively little, at least not in their respective countries, so that the corporate sector as a whole is accumulating excess savings.
There is talk of a “corporate saving glow” - of all things, the big companies, those parts of the economy whose core social task is to invest, hold back with business expenses.
In principle, companies have four options for using surpluses: build up cash buffers, repay debts, distribute profits or just invest. In fact, companies are accumulating ever higher reserves while investments paralyze. It's been like this for a long time. The corporate sector as a whole has been saving since the mid-noughties, as can be seen from Bundesbank figures. The financial assets of the companies have almost doubled in nominal terms since then.
And because the state has also been saving (»black zero«) since the beginning of the 2010s, the German economy produces gigantic foreign trade surpluses on balance: Germany exports around a quarter of a trillion euros in savings every year and invests it abroad.
Not a particularly convincing economic strategy in times when investments of gigantic proportions are required domestically: in climate, traffic and digital turnaround and a few other projects.
When, if not now!?
If things go well, the current high profits are a transitional phenomenon.
Then the companies take the money they receive and invest massively in new business and processes, preferably in Germany and the rest of the EU.
That would be a good development.
Many companies have full order books.
New markets are emerging.
This should be a good time to invest.
When, if not now?
In this situation, the state can do a lot to encourage companies to invest.
Opportunities for quick tax write-offs could make a contribution.
The most important task of the coming federal government will, however, be to create a reliable environment in the long term.
Uncertainty creates nervousness - among the general public, but also among companies.
In an empirical study we recently found together with colleagues from the Essen economic research institute RWI that the weak investment dynamics of the German economy in the past decade can be partly explained by an "investment narrative" in which political developments at national and international level play the decisive role . Where there is a lack of predictability, it is difficult to assess whether investment projects will pay off - in case of doubt, companies will keep their hands off them.
There is no question that the state has an important role to play.
But in view of the booming earnings situation, corporations and their associations should be very cautious with demands for subsidies.
Funds are available, at least as long as the lavishly gushing profits are not immediately distributed back to the shareholders - in the form of increased dividends or share buybacks.
The most important business dates of the week ahead
Open assembly area
Brussels -
EU, international
- meeting of EU foreign and defense ministers.
On the agenda is, among other things, cooperation in the field of security and defense, and in concrete terms probably also the current situation on the border with Belarus.
Frankfurt -
On the situation of money
- start of the conference "Euro Finance Week" (until Friday).
With all kinds of celebrities from business, politics and science, including Christian Sewing (Deutsche Bank), Bettina Orlopp (Commerzbank), Cornelius Riese (DZ Bank), Jörg Kukies (BMF), Volker Wieland (Advisory Council), Mark Branson (Bafin).
Expand Tuesday area
Luxembourg -
Europe's
performance
- The EU statistics agency Eurostat presents an initial estimate of economic growth in the EU and the euro area in the third quarter.
Frankfurt -
Germany's economy
- The chemical association VCI reports on the state of the industry in the third quarter.
Berlin -
give and take
- German Employers' Day.
The Federal Association of German Employers' Associations (BDA) invites you to the annual meeting.
Also there: Chancellor Merkel and her presumed successor Scholz.
Expand Wednesday area
Luxembourg -
Europe's inflation
- Eurostat publishes new figures on consumer price increase in October.
Tokyo -
Far Eastern Stuttering
- New data from Japan's foreign trade in October.
Japan's industry is also being hit by supply bottlenecks.
Expand Thursday area
Essen -
The steel, the climate
&
everything else - Thyssenkrupp presents its annual figures for its 2020/21 fiscal year.
Hangzhou -
By the grace of Xi
- Quarterly figures from the Alibaba Group.
China's leadership has been bothering founder Ma's data giant for months.
Open area Friday
Frankfurt -
Two people, two perspectives
- Two speeches meet at the "European Banking Congress": one by ECB President Christine Lagarde, one by Bundesbank President Jens Weidmann, who announced his resignation at the end of the year.